10/20/2003 @ 12:00PM

The Post-Enron 401(k)

Company-sponsored 401(k) retirement plans entered a new era of responsibility last month when a Texas federal judge ruled that former
Enron
employees could sue the firm, its directors and its 401(k) provider,
Northern Trust
, for failing in their fiduciary role under retirement security law.

Enron employees, in total, held nearly 60% of their retirement assets in company stock. As the company sank toward bankruptcy, Enron was changing plan providers, which prevented employees from selling shares. Simultaneously, Enron executives with personal holdings outside the 401(k) were unloading their shares.

Why did employees carry so much stock? Enron, like many other public companies, matched pretax 401(k) contributions with its own stock and limited the ability of employees to sell that stock. The judge’s ruling speaks just as loudly to 401(k) participants as it does to fiduciaries. The unwritten message: It’s time to get smart about your retirement.

While your company and its 401(k) provider, from
Fidelity
to
Charles Schwab
, may offer advice on mapping out your 401(k), they are in no way obliged to do so. Current legislation in Congress seeks to make quarterly employee education required, but the likelihood of a new law being passed wanes as the year drags on.

“Don’t think anybody disagrees that plan participants need more focused advice,” says
Mark
Ugoretz
Mark Ugoretz
, president of the ERISA Industry Committee, a Washington, D.C.-based organization that represents major employers. ERISA, the Employee Retirement Income Security Act of 1974, is the primary law protecting defined-benefit plans such as pensions and defined-contribution plans such as 401(k) and 403(b) plans.

Even without a congressional mandate, employers have spent the last year increasing their advice options. And employees have responded.
CitiStreet
, a major 401(k) plan administrator owned by
Citigroup
and
State Street
, has seen a three- to fourfold increase in requested advice over the past year. “Participants have become much more open in seeking advice,” says
Ray
Martin
Ray Martin
, president of
CitiStreet Advisors
in Boston. “Either they don’t trust their own ability, or they want a second opinion to confirm or challenge theirs.”

But taking advice can only get you so far. Diversification can be much more difficult if your plan is set up to match your contributions with restricted company stock.
Bernie
Palmer
Bernie Palmer
, a partner at
PricewaterhouseCoopers HR Services
, suggests making 401(k) accounts comply with a larger rule followed by multibillion-dollar pension plans. “Most can’t have more than 5% of assets in any one security,” says Palmer.

As of 2002, however, 401(k) holders with the option to hold company stock had an average of 24% to 30% of their assets tied up at work, according to a survey by the Employee Benefits Research Institute and the Investment Company Institute.

Palmer also says that company retirement committees and those responsible for selecting a 401(k) plan provider have awakened to a rising “fiduciary standard of care.” Some companies “have to put a little better diligence around it,” says Palmer.

Though employers and plan providers are gung ho on tightening the governance concerning the 401(k) plan and offering advice, “there is a concern of still-greater liability,” says
Josh
Sternoff
Josh Sternoff
, a senior associate at law firm
Paul Hastings
in New York.

It’s not hard to see why. If an employer offers investment advisors to employees, either free of charge or for a nominal pretax fee, employees given sour advice can trace the dollars right back to their own company.

While some employers are doing as much as possible to guarantee that their employees have all the tools available to make the right decisions, Ugoretz of the ERISA Industry Committee says that too many company human relations units “send out the material, and nobody reads it.”

For those employees who lack the time to read, seek advice or manage their own accounts, there is another option. Many companies offer “lifestyle funds.” These retirement choices are like a fund of mutual funds that automatically rebalances between stocks, bonds and cash, depending on your age or investment goals. “The only problem is that some people end up buying more than one,” says Palmer.

Decisions, decisions. It seems that you just can’t just leave your 401(k) on autopilot anymore, even if you’d like to. That means more headaches for employees–but less likelihood of seeing your entire retirement nest egg vanish into Chapter 11 along with your employer.